Is a Turnaround in Sight for HP?

Hewlett-Packard CEO Meg Whitman may have managed to turn the fortunes of the struggling information technology giant around. The company's share prices climbed as much as 7 percent in after hours trading on the strength of fourth quarter financial results that beat analysts’ expectations. Have corporate appetites for hardware and networking products returned?

Healthy Numbers

Financial results show overall revenues for the quarter ending in October hit $29.1 billion — more than $1 billion higher than expectations — with earnings per share of $1.01, up $0.01 on estimates. This translated to net income of $1.4 billion for the quarter.

However, while Whitman must have been pleased, she was not talking it up, at leas not yet. On a conference call, she told investors that next year will still be a difficult one with “headwinds almost across the board” with continued weakness in some markets.

HP’s PC Fortunes

Sales from HP’s PC unit fell again by 2 percent to $8.58 billion while sales of printers were also down by 1 percent to $6.04 billion. However, there were signs of hope because commercial revenues were up by 4 percent and notebooks were up by 3 percent.

Gartner has also predicted recently that the decline in the PC industry might have hit bottom. In a recent interview in the Wall Street Journal, Gartner analyst Tracy Tsai said the global slide in personal computer shipments would slow in the fourth quarter to a 3 percent year-over-year drop, compared with an 8.6 percent fall in the third quarter.

That is hard to see at the moment because HP’s figures showed a 10 percent decline in the consumer market. If the slide has stopped, it will be at least this quarter — if not the next — before it starts registering in the balance sheets of the big volume vendors.

HP Enterprise Group

However, Whitman has already indicated she wants to move HP away from dependency on the PC market and move it towards enterprise software and services.

The Enterprise Group did, in fact, perform, and that is where Whitman is placing her bets. In an effort to help performance here, in August she replaced the head of the enterprise group, Dave Donatelli, with Bill Veghte, who joined HP from Microsoft.

At the time, she blamed poor management of the group rather than a stagnant economy for the poor enterprise group performance in the third quarter, and her strategy appears to have paid off.

In the most recent quarter, Enterprise Group revenue was up 2 percent year-over-year. Networking revenues were up 3 percent, industry standard servers’ revenue were up 10 percent and storage revenue grew by 1 percent. However, the Business Critical Systems unit revenues were down 17 percent and technology services revenue fell 6 percent.

Enterprises services were also down 9 percent over the same period last year, which included a fall-off in business services revenue of 10 percent and a 9 percent drop in infrastructure services.

Software revenue was also down 9 percent year-over-year. Specifically, support revenue was up 4 percent, license revenue was down 24 percent, professional services revenue was down 13 percent and software-as-a-service (SaaS) revenue was up 15 percent.

While the drop in license revenue seems dramatic, it reflects tighter corporate budgets and the promise that there will be a turnaround here once corporate spending gets back to normal.

HP in 2014

It has been a tough year for HP, with a lot of troubled water under the bridge since this time last year, but at least it is under the bridge — financially speaking — rather than ahead of it.

Already, by the end of the fiscal year, it will have shed 29,000 jobs worldwide in a cost cutting exercise. But Chief Financial Officer Cathie Lesjak is looking for further cuts.

The Autonomy financial write-down is now behind HP, too, but the legal cases around the acquisition are still ahead of it and could begin as early as next year, even if Autonomy’s technology is steadily being integrated across the wider HP portfolio.

However, the markets seem happy, and progress has been steady. Whether there are further indications that HP has turned the corner in the next quarter results remains to be seen, but the signs are looking good.

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